Friday, October 28, 2022

Inflation as a global phenomenon - Do not forget

We cannot forget that inflation is a global phenomenon. I listened to MIT professor Kristin Forbes, who is an expert on inflation, at the latest State Street conference reinforce this point. She emphasized that CPI inflation as measured by PCA is a growing global issue. The first principal component can explain about 60% of the variation in the CPI. The latest updated numbers are even higher. We cannot get away from the current global inflation shocks that are coming in the form of an oil price shock, pandemic residuals, global supply chain issues, and a general commodities shock. 

Central banks are all fighting the same problem, but the response will be different because the impact of these shocks will be different. This is why the first principal component varies over time. We do not dismiss the impact of surging monetary liquidity over the last decade, but the inflation catalysts were a complex set of shocks over the last two years. 

The policy hope is that the global shocks will dissipate. The policy fear is that inflation expectations rise and inflation gets embedded in wages. The critical macro thinking combines acceptance of the global inflation story coupled with the reality that the inflation impact and policy response will differ around the globe.

No comments: